U.S. health care expenditures are projected to increase from $1.3 trillion in 2000 to $2.2 trillion in 2008 (a projected 6.8% annual increase). The Heritage Foundation estimates that growth in health care spending will outpace growth in gross domestic product (GDP) by an average of 1.8% annually. From 2000 to 2008, health spending as a share of GDP is estimated to increase from 14.0% to 16.2%.
Employers are finding that the managed care methods used successfully in the past are less effective at controlling cost increases today and create employee/participant dissatisfaction. Managed care has come under attack as being unfriendly and characterized by increased interference in the patient-doctor relationship, increased office administration for doctors and hospitals, and increases in “denied care.” The public is skeptical concerning the industry's stance that managed care improves quality and outcomes.
Strong market forces are at work in the health care field to both change this skepticism and improve cost controls. Defined contribution health care, like defined contribution retirement plans, are being created to give beneficiaries more control over their health care benefits. Experts agree that change is dramatically necessary as health care costs continue to escalate because today's defined benefit environment establishes perverse incentives for users of health care. Today, health care beneficiaries have an entitlement mindset (and maximizing insurance usage)—they are not satisfied unless their benefits exceed their out-of-pocket costs for insurance premiums, deductibles, co-pays, etc. With defined contribution, the hope is that this mindset can shift to one of privilege and custodianship and a measured assessment of costs and benefits.
One mechanism offered by the U.S. Congress and subsequently put into law in 1996 to support the movement to defined contribution was the establishment of Medical Savings Accounts (a.k.a. Archer MSAs). Archer MSAs permit tax-advantaged pre-funding of current and future health benefits. Required to be combined with high-deductible insurance plans and available only to small employers and self-employed individuals, these plans offered additional choices and the opportunity to change the perverse incentives the insureds have to increase utilization so that they get their monies worth from their low-deductible, first dollar plans.
With Archer MSAs, Congress sought to reduce health care utilization and lower claims costs by providing tax incentives. As a result, Archer MSAs seek to provide improved tax efficiency, and to reduce utilization and lower claim costs. MSAs provide an enhanced tax-advantaged funding mechanism for accumulating money during an employee's working lifetime to pay current and future health benefits. Employer contributions to the fund are immediately deductible and accumulate tax-free when utilized for eligible medical expenses. MSAs offer health benefit structures that increase choice, decrease administrative costs, simplify benefit utilization, offer greater participant control, and provide strong incentives to plan participants to use benefits efficiently (reducing utilization and lowering health care costs).
Although Archer MSAs offer an attractive alternative for small employers of less than 50 employees.